Question

Why is it so important for an economy to have a fully developed financial markets?

Answer 1

Finance is just like blood in human body for the industries and bussinesses. And finance can be taken from the financial market available in an economy.

Finance market include Capital market consisting of Stock Market(which provide financing through the issuance of shares) & Bond Market(which provide financing through the issuance of bonds), Commodity market(which facilitate the trading of commodities), Money Market( which provide short term debt financing and investment), Derivative market(which provide instruments for the management of financial risk), Future market(which provide standardized forward contract  for trading products at some future date), Foriegn excahnge market(which facilitate the trading of foreign exchange),Spot market, Inter Bank Lending Market.

A good financial market is the need of every economy which can be unsderstand through its important functions.

Intermediary functions.

• Transfer of resources: Financial markets facilitate the transfer of real economic resources from lenders to ultimate borrowers.
• Enhancing income: Financial markets allow lenders to earn interest or dividend on their surplus invisible funds, thus contributing to the enhancement of the individual and the national income.
• Productive usage: Financial markets allow for the productive use of the funds borrowed. The enhancing the income and the gross national production.
• Capital formation: Financial markets provide a channel through which new savings flow to aid capital formation of a country.
• Price determination: Financial markets allow for the determination of price of the traded financial assets through the interaction of buyers and sellers.

Financial Functions

• Providing the borrower with funds so as to enable them to carry out their investment plans.
• Providing the lenders with earning assets so as to enable them to earn wealth by deploying the assets in production debentures.
• Providing liquidity in the market so as to facilitate trading of funds.
• Providing liquidity to commercial bank
• Facilitating credit creation
• Promoting savings
• Promoting investment
• Facilitating balanced economic growth
• Improving trading floors

Moreover One of the important sustainability requisite for the accelerated development of an economy is the existence of a dynamic financial market. A financial market helps the economy in the following manner.

• Saving mobilization:
• Obtaining funds from the savers or surplus units such as household individuals, business firms, public sector units, central government, state governments etc. is an important role played by financial markets.
• Investment: Financial markets play a crucial role in arranging to invest funds thus collected in those units which are in need of the same.
• National Growth: An important role played by financial market is that, they contribute to a nation's growth by ensuring unfettered flow of surplus funds to deficit units. Flow of funds for productive purposes is also made possible.
• Entrepreneurship growth: Financial market contribute to the development of the entrepreneurial claw by making available the necessary financial resources.
• Industrial development: The different components of financial markets help an accelerated growth of industrial and economic development of a country, thus contributing to raising the standard of living and the society of well-being.